The Low Velocity Economy Continues

 The second look at 4Q15 continued to reflect an economy that is growing, but that growth is subpar economic growth and the outlook calls for more of the same. That means there should continue to be job growth, but not growth that is not strong enough to meaningfully increase participation rates and income growth rates. Real interest rates should remain low and the inflationary pressures should come from those factors most influenced by government policy. 

Real economic growth in the second revision of 4Q15 GDP was revised up 0.3% to 1.0%. However, the revision came mainly from a change in the pace of inventory adjustments. Real private domestic final purchases still grew +1.8%, while personal consumption expenditures were revised down 0.2% as a result of a -0.9% revision to durable goods. Also, fixed investment was revised down 0.1% and real disposable income was also revised down; by 0.4%. 

Not much change in the pace of growth is expected as calendar year 2016 has the strongest outlook of the next four years (figure 1). Personal consumption expenditures (PCE) remain almost 70% of GDP and services share continued to rise (figure 4). One reason is health care spending, which exceeds 21% of PCE (figure 5). Real fixed investment before inventory adjustments growth fell to 3.1% over the past year, a continuation of the slowdown since the 2012 peak pace. Within the space, residential housing should continue to be a source of strength. Global trade remained weak with the exports and imports falling more than 5% in the past year, and the last twelve month trade deficit remained over $530 billion. Accelerating real economic growth requires changes in fiscal policies. Using monetary policies as a substitute is not the answer. 

 Figure 1: Consensus Real GDP Estimate Trends for the United States

Figure 4: Personal Consumption Expenditures to GDP

Figure 2: Real Annual GDP Growth

Figure 5: Health Care Spending Share of Personal Consumption Expenditures

Figure 3: Sources of Quarterly GDP Growth

Figure 6: Gross Private Fixed Investment to GDP

Figure 6: Gross Private Fixed Investment to GDP

Figure 7: Residential Fixed Investment to GDP

Figure 7: Residential Fixed Investment to GDP

Figure 9: Government to GDP

Figure 8: Exports & Imports to GDP

STRATEGY: 4Q15 GDP 2nd Estimate – Price & Quantity

Figure 1: Real GDP Growth – Quantity and Price

Demand growth in the form of quantity growth is a sign of a strong and more vibrant economy, while growth caused by higher prices is not. 4Q15 GDP growth continued to be driven more by demand growth than price increases with the trends starting to converge. Both levels remain below historic norms. The strongest source of demand growth remains the durable goods component of personal consumption (PCE) (figure 3), where the price index continued to decline. Other than durable goods, household demand remained between close to 2.5%. Services (figure 5) have the most price pressure of the PCE components. Business real growth also remains below historic norms (figure 6). Government economic growth continues to be more a function of pricing than demand (figure 7), which to us is a reflection of a less responsive pricing mechanism. 

A source of long term market strength is often tied to stronger demand, while weakness is tied to stronger pricing. Right now, demand is off its recent peak and would have to almost double to return to levels sustained in the expansions of the 1980s and the 1990s. Modest demand growth is a sign of a low velocity economy. 

Figure 2: Real GDP Growth of Households – Quantity and Price

Figure 3: Real GDP Growth of PCE: Durable Goods – Quantity and Price

Figure 4: Real GDP Growth of PCE: Nondurable Goods – Quantity and Price

Figure 5: Real GDP Growth of PCE: Services – Quantity and Price

Figure 5: Real GDP Growth of PCE: Services – Quantity and Price

Figure 7: Real GDP Growth of Governments – Quantity and Price